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SA corporates hoard cash - expert

Nov 07 2012 13:41

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Cape Town - Reserve Bank figures show record cash balances are being held by the private non-financial corporate sector. Recent political and economic instability has undoubtedly played a role in this cash buildup.

However, with historically low interest rates and corporate balances in South Africa increasing, it is crucial for companies to ensure that they utilise their cash balances effectively by selecting the investment vehicle best suited to their individual profile.

This is according to Ian Ferguson, head of cash solutions at Nedgroup Investments, who believes corporate cash piling is counter-intuitive considering that interest rates are wallowing at near 40-year lows.

“An astounding R549bn was sitting on the balance sheets of such corporates at the end of August 2012, representing an increase of 14% over the last year – double the growth rate of overall deposits,” he said.

Ferguson, speaking at a Nedgroup Investments media roundtable held in Sandton on Wednesday, said corporate cash piling is not unique to South Africa, although the reasons for the cash buildup in South Africa differ from those offshore and companies need to consider their options within the local context.

“The decision by South African corporates to build their cash to such levels appears to be driven by a number of factors - including delayed investment in projects and expansions.

"Political instability, unclear policies and labour unrest have all contributed to an uncertain environment for business which has made planning and forecasting difficult for corporates,” he said.

The fact that banks are not lending as freely as they did in the past has also meant that corporates need to shore up their balance sheets and alter capital structures which will in future involve lower levels of debt funding, or alternative sources of funding.

“The implementation of Basel III will most certainly result in higher interest rates being charged by banks who will be required to hold higher levels of capital, the cost of which will have to be passed on to borrowers in the form of higher interest rates,” said Ferguson.

However, despite such a large increase in deposits, statistics released by the Association for Saving and Investments South Africa (Asisa) show that the size of money market funds have declined by 8% over the last year.

Ferguson said the prevailing lower yields have forced investors to migrate into more aggressive income funds and Domestic Asset Allocation funds, which now make up the largest segment (31.5%) of the unit trust industry.

“The decrease can also be attributed to the elimination of dividend income funds. Furthermore, money markets have been used extensively as collateral for securities lending in the past.

"There has been a clear drop in the volume of securities lending taking place as a direct result of the financial crisis, and those traders who are still active in this space are now making use of alternative collateral, with a definite move towards equity,” he said.

Meanwhile, Asisa statistics show that although domestic money market funds have been experiencing net outflows since the start of 2011, they enjoyed a net inflow of R10.8bn in the third quarter of 2012, caused by a handful of corporate and institutional investors parking money to better utilise large cash reserves.

“The corporate sector continues to make good use of money market funds which deliver higher yields than call accounts and offer the same access to funds without incurring additional risk,” said Ferguson.

According to Ferguson, there has also been a noticeable rise in the use of low risk income funds by those corporates that are able to forecast cash flows and do not require same-day access to funds.

“Treasurers are embracing the additional 0.5% that can be earned in such funds which have similar credit risk to money market funds, but require a day’s notice in order to access funds,” he said.

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